Crude, Pump Price, and You!

This morning during my morning routine, a caller to WKBK-1290 got me to thinking again. As I made my way to work over the next hour, I found myself thinking about that call, and decided to fire off the below email to Danny Mitchell at the station…

Danny,

I heard your broadcast this morning where a listener called challenging how barrel prices related to changes at the pump. He did the simple math of $82 barrels divided by 42 gallons of crude suggested that something was out of whack with paying $3.20 per gallon at the pump.

As the manager of a group whose responsibility it is to forecast the automotive industry, crude oil prices and gas prices are always high on our radar. As a determiner of what kind of vehicle gets purchased (high or low mileage), and how frequently people drive (less miles equals less service), gas and oil price is a good indicator of the future of the industry. Having watched these figures for years, I can assure folks the math works, albeit not as simply as we would all like.

According to the American Institute of Petroleum, 45% of the barrel of crude becomes gas. Today a 42 gallon barrel of crude will produce only about 19 gallons of gas. From that same barrel, diesel, petroleum products used in manufacturing, jet fuel, propane and asphalt are among some of the products that are refined. So in the end, 19 gallons of gas are produced from a barrel and assigned a cost of roughly $37 ($82/barrel times 45%)

The Department of Energy estimates that roughly 60-70% of pump price is directly related to crude price. If the cost of crude is $1.95/gallon ($37 divided by 19 gallons), one would expect the pump price to be at about $2.80-$3.25 per gallon. Interestingly enough, AAA reported a national average of $3.25 today.

Above the price of crude, the D.O.E. estimates 14% of the price of gas is found in refining costs, 8% in distribution and marketing, and about approximately 15% in taxes. There are also a few pennies that should be assigned to service station profit. All of these are continually fluctuating and lead to some of the changes in day to day gas prices.

(Department of Energy, 2011)

If there is any component of pump price that should cause us all to get angry it is what is called the speculative premium. There is a cost to find, extract, and sell crude oil, but it is nowhere near the $80-100 per barrel. Just two months ago, Goldman Sachs and the Wall Street Journal reported that market speculation (via forward contracts, hedges, and futures, etc) added $20-30 per barrel. Some say it upwards of $60 per barrel. Gaining control of that one piece would lower pump price to something more akin to $1.80/gallon (using the $20.00 estimate).

Beyond the Wall Street component, there are countless other factors which we must take into account. A simple “drill baby drill” approach, or a one, black and white answer is not enough. No one person/company/entity is to blame for oil prices. It would be naive to even think so. If we want someone to blame we can certainly point fingers at the Exxon’s of the world, but also need to take some ownership ourselves. We drive inefficient vehicles. We fight for legislation that makes drilling in the US more costly. We fight wars in oil rich areas leading to instability in price. We subsidize Oil companies via tax breaks. We don’t mandate cleaner fuel standards. We have outdated refining capabilities in the US.

Some on both sides of the political or ideological fence would tell you there is an easy solution, but frankly there is none. No matter what Sarah Palin or Barak Obama would have believe it’s not a quick fix. We are called to be stewards to all the resources entrusted into our care and sadly, we have been anything but. As seen in many aspects of our government, our politics, our consumerism, and our community, we are too eager to point fingers and cast blame.

We all need to consider this when we turn the key on our gas guzzler, and drive a quarter mile down the road to buy milk!

I hope that where ever this new economic crisis takes us over the next few weeks and months, I hope that there can be some positive that comes out. I hope that we can stop embracing the stubborn, one size fits all, my way or the highway, and realize that there are no quick answers, and no easy ways out. Not everything is a conspiracy, and we can’t discredit someone simply because they are a democrat or a republican. We need to start embracing the fact that we are all part of the problem, and some how we all got to be part of the solution. This is especially important for people of faith to embrace, as it is integral to our very understanding of the nature of stewardship.

Its important to note that depending on who you ask there are 100 ways to estimate pump prices. This is by no means the only. I would be curious to hear your comments on this at pastorscott2007@yahoo.com